Why Coca-Cola and Starbucks Will Remain Among The World’s Most Valuable Brands

Will Coca-Cola and Starbucks retain their top billing in the next decade?

In the 2014 BrandZ Top 100 Most Valuable Global Brand rankings released this month, two beverage-focused companies stood out among the top 50 most valuable brands -- Coca-Cola(NYSE:KO) in sixth place and Starbucks(NASDAQ:SBUX) in 31st. The old winning formula for beverage companies was to build brands, develop flagship products, and wait for the cash registers to ring. This doesn't work as well now, as consumer preferences have changed. What have Coca-Cola and Starbucks done right to deserve their status as world-leading beverage brands?

The new Coke?Coca-Cola has been one of, if not the most successful beverage companies in history. The numbers speak for themselves, with Coca-Cola's market share of U.S. carbonated soft drinks (CSD's) having remained stable for the past few decades. For the record, its market share was 36%, 40%, and 42% in 1977, 1986, and 2013, respectively. But even a giant like Coca-Cola was unavoidably affected by the trend of consumers moving away from sodas because of increased health consciousness. In line with the 3% drop in U.S. CSD volumes, Coca-Cola's 2013 revenue declined by 2.4%.

Coca-Cola hasn't stood still in face of industry headwinds; it has worked on staying relevant with consumers. One such initiative is the launch of its Freestyle machine, which dispenses as many as 146 unique flavors. This works because it's faced with a new generation of consumers.

In 1986, when Coca-Cola introduced a reformulated version of Classic Coke called New Coke, it was met with huge consumer backlash. Americans insisted that they wanted their Classic Coke back. Now, it's all about change for the millennial generation, which demands choices and customized products. Coca-Cola's Freestyle machine is a step in the right direction, as it aims to win the hearts and minds of the new generation of soda drinkers.

Coca-Cola also took product customization and individualization to a whole new level with its 2013 U.K. '"Share a Coke' campaign, where it replaced its brand name on its products with 150 popular English names. This set consumers on the hunt for Cokes carrying their names. Initial results were impressive, with Coca-Cola increasing its followers on social media platforms by as much as 7%. A similar campaign in Australia in 2011 also resulted in 7% growth in adult consumption.

If Coca-Cola is to retain its 40% market share of the U.S. CSD market, it's likely such initiatives will be the norm rather than the exception. However, it won't do Coca-Cola any good if there isn't sufficient awareness about its strategic initiatives targeted at consumers. In its most recent first-quarter results, Coca-Cola reiterated that it will 'invest an incremental $400 million in 2014 media initiatives in order to accelerate top-line growth.'

Not just a coffee chain anymoreWhile Starbucks used to be known as a differentiated coffee-drinking experience for coffee lovers, it is now more apt to call Starbucks an 'anywhere, anytime beverages company.' If you don't want to pay premium prices for a cup of latte, Starbucks has a mass-market brand called Seattle's Best Coffee, which offers a similar coffee drinking experience at a lower price point.

On the other hand, if you are a busy office worker who wants a quick caffeine boost and don't want to walk to the nearest Starbucks outlet, Starbucks VIA, its instant coffee brand, will allow Starbucks fans to have a cup of freshly brewed Starbucks coffee at their convenience. For those willing to pay more and wait longer, Starbucks launched Verismo, its single-serve coffee-maker product, which promises to deliver Starbucks coffee of similar quality to the ones available at its physical outlets. According to its internal estimates, Starbucks' market share of the domestic at-home coffee market is approximately 13%.

Although there are many people who are hardcore coffee addicts, there are probably an equal number of consumers who will just give coffee a miss. Starbucks wants to capture this market of non-coffee drinkers as well by leveraging its reputation for quality.

One potential area is the cold-carbonated-beverages market, where Starbucks has set its sights with its new line of handcrafted cold carbonated beverages called Fizzio. Following a successful test launch in the past quarter, Starbucks will introduce Fizzio to its 3,000-plus domestic outlets and certain countries in Asia such as Singapore, Korea, and China

Another area is tea. After purchasing mall-based tea retailer Teavana in November 2012, Starbucks opened its first tea bar in New York in October. In a recent interview with CNBC, Starbucks CEO Howard Schultz said that it has plans to 'dominate the tea market the same way it conquered the global coffee market.' As a sign of its ambitions, Starbucks recently collaborated with Oprah Winfrey to launch Teavana Oprah Chai Tea Latte.

Starbucks has been one of the fastest-growing beverage companies in the past few years, both in terms of financial and market variables. It has grown its earnings per share by more than 15% in the last four years, while its share price has increased by close to 1,000% over the same period. With Starbucks' historical growth coming from filling the world with its physical outlets, its future growth prospects look even more attractive.

Foolish final thoughtsIn this new competitive environment, beverage companies with the ability and willingness to adapt to changing consumer preferences will have a much better chance of emerging as winners. For now, I am placing my bets with Coca-Cola and Starbucks.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and Starbucks. The Motley Fool owns shares of Starbucks and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Mark is a private value investor and is the author of CheapskateInvesting.com website which uses a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders.